Difference Between Direct and Indirect Taxes

The difference between direct and indirect taxes is the basis on which they are applied. While direct taxes are levied on people's wealth, indirect taxes are levied on how this wealth is used.

Taxes are the tributes or payments that citizens must make to the government without the latter being obliged to give them a direct consideration. In the vast majority of countries, taxes are the most relevant source of resources for the government. Without them, it would probably not be able to finance its activities or its social policies.

Taxes can be divided into various categories. If we consider the basis on which they are applied, they are divided into direct or indirect taxes. The former tax the wealth , income or a direct manifestation of the person's wealth. Thus, for example, they can tax houses, land, salaries , etc. The latter, on the other hand, tax the use or indirect manifestation of wealth. Thus, for example, they tax the consumption of goods or services.

In simple terms, direct taxes are levied on what a person has or earns. Income tax, corporate tax or wealth or heritage tax are the most important examples of this tax.

Indirect taxes are levied on the indirect manifestation of people's wealth. This is why they tax consumption and transfers of goods or rights.

Direct taxes in Spain

In the case of Spain, the main direct taxes are the following:

  • Personal Income Tax (Law 35/2006 of November 28 and Royal Decree 439/2007 of May 30). In this case, the taxpayer must declare all income from work and capital that he has obtained during the period (fiscal year) and pay a tax on them.
  • Non-Resident Income Tax (Royal Legislative Decree 5/2004, of March 5 and Royal Decree 1776/2004, of July 30). It is applied to the income obtained in the national territory by individuals who do not have Spain as their place of residence.
  • Corporate Tax (Royal Legislative Decree 4/2004, of March 5 and Royal Decree 1777/2004, of July 30). It is applied on the net profit obtained by companies.
  • Tax on Inheritance and Donations (Law 29/1987, of December 18, and Royal Decree 1629/1991, of November 8).
  • Wealth Tax (Law 19/1991, of June 6, and Royal Decree 1704/1999, of November 5).
  • Real Estate Tax . It applies to the possession of a home.
  • Tax on Economic Activities . A tax is applied on entrepreneurial activity.
  • Tax on Mechanical Traction Vehicles . A tax is paid for owning a vehicle.
  • Tax on the Increase in Value of Urban Land.

Indirect taxes in Spain

In the case of Spain, the most relevant indirect taxes are the following:

  • VAT or Value Added Tax . It is applied to spending on goods and services for final consumption.
  • Tax on Property Transfers and Documented Legal Acts . It taxes the circulation of goods, the rights and the expense of the money or the income that we have.
  • Special taxes . They are taxes that are applied only on the consumption of certain goods or services such as tobacco, alcohol, fuel, etc.
  • Customs Income (Regulation (EEC) 2913/92 of the Council, of October 12, 1992, approving the Community Customs Code).